9911796707
TMI Blog2010 (1) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... ith its entire shareholding in its two subsidiaries namely ISM Ltd. and RWL Ltd. to M/s. HMP Ltd. for a consideration of Rs. 15 crores. The sale deed for this was registered on April 4, 1991 and the sale has been effected from April 1, 1991, i.e., the first day of the previous year relevant to this assessment year. The assessee-company had advanced interest-free loans to the two subsidiaries which as on March 31, 1991 was as under: RWL Ltd. Rs. 248.13 lakhs ISM Ltd. Rs. 563.06 lakhs On the date of sale M/s. ISM Ltd. was in the BIFR and as such the assessee-company could not have sold off the shares. Therefore, to get ISM released from BIFR the assessee-company advanced further loan to ISM under BIFR direction and also gave further loan to RWL after April 1, 1991, i.e., the date of sale. Further loan given after April 1, 1991 to RWL Ltd. Rs. 2,00,59,776 Further loan given after April 1, 1991 to ISM Ltd. Rs. 8,40,22,992 The entire loan to the two subsidiaries amounting to Rs. 14.03 crores to ISM and Rs. 4.48 crores to RWL Ltd. has been written off during the year and has been claimed as trading loss. It may be pointed out that there is no business transaction between the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred a loss inasmuch as Rs. 14.04 crores and Rs. 4.49 crores have gone out of its coffers forever. But this is the loss which the assessee-company had to incur in order to sell its engineering division as a package along with its subsidiaries and is therefore, clearly a long-term capital loss on sale of the engineering division." The Assessing Officer relied upon the judgment of the hon' ble Supreme Court in the case of CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC), Badridas Daga v. CIT [1958] 34 ITR 10 (SC) and a judgment of Calcutta High Court in the case of Indo-Burma Petroleum Co. Ltd. v. CIT [1982] 136 ITR 251 (Cal) and held as under : "Here in the instant case the loss has been incurred in connection with the stoppage of the business rather than in the course of it. It has come to the assessee-company as on seller of the trade/business rather than a trader. It is therefore clear that in the light of the settled view of courts on the matter, the loss of (14.04 + 4.49) = Rs. 18.53 crores cannot be treated as a revenue loss. The same is allowed as a long-term capital loss in connection with the sale of engineering division. It may also be pointed out that though the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and RWL Ltd., the assessee was to give advance to the subsidiary company from time to time against purchase of portable tools by the assessee-company. Due to the high cost of labour and material and increased competition, the performance of RWL was not good for the last 2 to 3 years prior to the sale of shares by the assessee-company and as such it suffered heavy loss. The learned authorised representative submitted that total amount advances given and expenses funded by the assessee-company was Rs. 4,48,72,776, the break-up of which is as under : Expenses Rs. 1,74,04,000 Advances Rs. 2,73,88,776 The learned authorised representative submitted that in view of the heavy loss, the subsidiary was unable to repay the advances/expenses and as such considering the overall facts, as well as to protect the company' s interest and image, the management decided to write off the said sum of Rs. 4,48,72,776 since it was in the normal conduct of the business that the loss is allowable. The learned authorised representative submitted that similar is the position in respect of ISM. The learned authorised representative submitted that ISM was a subsidiary of Ahura Consultants and Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts are correct subject to placing certain figures in wrong group, namely, advance to RWL amounting to Rs. 2,48,12,776 should have been under the head " group" and ISM. Advance of Rs. 23,78,973 should also have been in " group" but wrongly placed under " engineering division" . The learned authorised representative submitted that under the circumstances of the case, the assessee is entitled to deduction of loss even on commercial expediency. The learned authorised representative in support of his contention relied upon the following decisions: (1)CIT v. F. M. Chinoy and Co. P. Ltd. [1969] 74 ITR 780 (Bom). (2) Indian Commerce and Industries Co. P. Ltd. v. CIT [1995] 213 ITR 533 (Mad). (3) Vassanji Sons and Co. P. Ltd. v. CIT [1980] 125 ITR 462 (Bom). (4) CIT v. Bhawani Prasad Girdhari Lal [1981] 127 ITR 800 (All). (5) CIT v. Amalgamations P. Ltd. [1997] 226 ITR 188 (SC). (6) S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC). (7) CIT v. Gillanders Arbuthnot and Co. Ltd. [1982] 138 ITR 763 (Cal). We have heard the learned representatives of the parties and perused the record as well as gone through the decisions cited. The issue before us to be examined whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gents directly providing finance to the company which they manage. It was clear that, unless the amount payable to the workers for retrenchment compensation had been guaranteed, the transaction of the sale of company ' A' s property would not have gone through and if it had not gone through, the assessee would have been under a liability to pay at least the amount which it had guaranteed. The further payment which they made towards the retrenchment compensation was to save them from a larger loss. It was a payment made in the course of their business or, alternatively, a payment wholly and exclusively laid out for the purposes of their business. The contention that the payment was made to enable the winding up proceedings to take place, could not be accepted. It did not appear that company, though indebted, was insolvent and for that reason could be taken into compulsory liquidation. On the other hand, it appeared that its managing agents for their own ends decided upon a transfer of its properties and business to another party with a view to pay off the debts of Amco. The immediate purpose for which the guarantee was given was not to enable any winding up to take place. The windin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be held that the Tribunal was not correct in holding that the loss suffered by the assessee was liable to be taxed under the head ' Capital gains' . Hence, the said loss was allowable as business loss. (iii) Vassanji Sons and Co. P. Ltd. v. CIT [1980] 125 ITR 462 (Bom). The facts of that case were that according to the memorandum of association, the main object of the assessee was to acquire certain managing agency business from the predecessor firm as also to carry on business as managing agents, selling agents, commission agents, brokers, etc. It could also carry on business of money lending, discounting and purchasing of bills and other negotiable instruments. The assessee-company along with two others promoted a company called N Ltd. The assessee and the two others also started another company called VHD Ltd. to manage N Ltd. as its managing agents. The shares in VHD Ltd. were held equally by the three parties, viz., the assessee-company and the two others. These three parties also acquired certain shares in N Ltd. The assessee had also advanced certain moneys to N Ltd. During the relevant assessment year N Ltd. went into liquidation, and the assessee accordingly claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection could not be considered too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in the instant case must be that of a businessman and on that approach the amount of Rs. 1,30,925, had to be allowed to the assessee as a trading debt for the year in question. (iv) CIT v. Bhawani Prasad Girdhari Lal [1981] 127 ITR 800 (All). The assessee-firm, which was carrying on selling agency business, advanced loan to a company. Subsequently, assessee entered into a settlement by which part of outstanding amount was to be paid by transfer of shares of certain company. As market value of those shares fell short after adjustment of outstanding amount, the assessee claimed it as business loss. The Income-tax Officer disallowed the assessee's claim. However, on second appeal, the Tribunal held that the loss which occurred in the readjustment of the books was a business loss which was allowable on grounds of commercial expediency. The Tribunal found that the assessee was pressurised into agreeing to advance the loan as well as to accept the part payment in satisfaction of the loan, because its selling agency business from the various mills of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the receipts from the liquidator as income as a protective measure. On appeal, the Appellate Assistant Commissioner confirmed the disallowance for the assessment year 1958-59 but the appeals for the years 1959-60 to 1962-63 were allowed in so far as they related to the question of the receipts in the respective years from the liquidator. On cross-appeals, the Tribunal held that the assessee-company had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. But since the assessee-company had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63 the balance amount remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. The High Court held that the assessee-company had incurred the loss in carrying on its own business which included furnishing guarantees to debts borrowed by its subsidiary companies. It held that the assessee-company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators which was received in the relevant previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court, the Tribunals and other authorities were to be set aside and the matter was to be remanded to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. (vii) CIT v. Gillanders Arbuthnot and Co. Ltd. [1982] 138 ITR 763 (Cal). Besides being engaged in various other activities, the assessee-company was also engaged in the business of financing or advancing loans to its subsidiary companies, which were all controlled by it. At a time when the financial position of one of its subsidiaries was weak, the assessee purchased the share capital of that subsidiary company and advanced unsecured loans to it. The subsidiary company subsequently went into liquidation and certain amount of the assesseecompany remained due on the subsidiary company. When the liquidator informed the assessee that there was no chance of effecting any recovery from the subsidiary company, the assessee wrote off the sum of Rs. 87,546 as bad debt and claimed it as a deduction under section 36(2). The Income-tax Officer held that as the financial position of the subsidiary company was not sound at the time the loans were advanced and as no interest was charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich reads as under : "The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D." The question is whether under the circumstances monies paid are allowable as deduction in computing the profits of a business under section 29 of the Act. Before discussing that, it is necessary that we should examine the principles that are in law applicable to the determination of the question. Three grounds can be put forward in support of the claim for deduction: (a) that the loss sustained is a bad debt allowable under section 36(1)(vii) of the Act ; (b) that it is a business expense falling within section 37(1) of the Act; and (c) that it is a trading loss, which must be taken into account in computing the profits under section 29 of the Act. As regards the first ground, the authorities have consistently held that the deduction is not admissible under section 36(1)(vii) of the Act, and that, in our view, is correct. Nor can a claim for deduction be admitted under section 37(1), because moneys which are paid can in no sense be said to be " an expenditure laid out or expended wholly and exclusively" for the purpose of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure, if it was incurred on grounds of commercial expediency. The line of distinction as to whether a particular loss is a trading loss or a capital loss has sometimes been very subtle and thin resulting in expression of different opinions by the different High Courts. The leading decision is in the case of Badridas Daga v. CIT [1958] 34 ITR 10 (SC). The principle decided in that case was reiterated with greater force, if we may say so with respect, in another decision of the apex court in CIT v. Nainital Bank Ltd. [1965] 55 ITR 707. In Badridas Daga' s case [1958] 34 ITR 10 (SC) an agent of the assessee withdrew from the firm' s bank account large sums of money and applied them in satisfaction of his personal debts incurred in speculative transactions. A part of it was recovered from him but the balance of Rs. 2,00,000 and odd was written off at the end of the accounting year as irrecoverable. The question for consideration was whether the amount embezzled by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. And that is how it would be dealt with according to ordinary commercial principles of trading. At the same time, it should be emphasised that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking comprising 2,89,668 equity shares of Ralliwolf Ltd. and 43,228 equity shares of ISM and the entire engineering undertaking in RIL. The purchase consideration for the entire package would be Rs. 15 crores payable as follows : (i) Rs. 1.5 crores on execution of the memorandum of understanding, (ii) Rs. 1 crore on the execution of the sale agreement following the approvals of the respective boards of RIL and the buyer in the first week of April, 1991, (iii) Rs. 2.5 crores on December 31, 1991 subject to the receipt of all the necessary consents and approvals required for effecting the sale contemplated in the memorandum of understanding (a draft copy of which was tabled) and the sale agreement, (iv) Rs. 2.5 crores on December 31, 1992, (v) Rs. 2.5 crores on December 31, 1993, and (vi) Rs. 5 crores or 50 per cent. of the net realisation (whichever is higher) from the sale of land situated at A.G. Pawar Lane, Byculla, Bombay, on which the ISM Factory is presently situated, as and when the sale of the said premises is effected. It was also decided in the said meetings that in the case of ISM, RIL in order to satisfy the requirements of the BIFR, have to takeover and dischar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be recoverable. This amount had now been determined at Rs. 2,73,93,076.33 and as this sum was not at all recoverable it authorises its writing off in the books of account of the company as bad and irrecoverable debt. The board considered this matter in detail and thereafter passed the undernoted resolutions : Resolved that the company be and is hereby authorised to write off as a bad debt the sum of Rs. 2,73,93,076.33 representing the amount outstanding as on March 31, 1991 of the interest bearing advance given by the company to RWL from time to time. Further resolved that copy of this resolution be furnished to Ralliwolf Ltd. for purposes of passing the necessary corresponding entries in its own books of account. In the meeting of board of directors dated August 30, 1991. The chairman stated to the members of the committee that the said meeting had been called at short notice in order to deal with certain important developments that had taken place in connection with the sale of the engineering undertakings and the sale of direct and indirect shareholding in RWL and ISML to Mr. M. P. Poddar and/or his nominees. In order to settle accounts between RIL and Mr. M. P. Poddar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores, and inventories Rs. 6 crores would be deducted leaving a figure of secured bank borrowings of Rs. 5.82 crores as at March 31, 1991 to be assumed by the buyers. (c) The sum of Rs. 12 crores mentioned in item (b) above would be settled as follows : (i) Rs. 3 crores would be paid to RIL by the buyers immediately on settlement of accounts. (ii) The balance of Rs. 9 crores would be paid to RIL by the buyers in six equal annual instalments of Rs. 1.5 crores each with the first instalment being payable on April 1, 1992. No interest would be payable in respect of the instalment payment of Rs. 9 crores. The members of the committee debated the issue in detail and concluded that the sale arrangement that had been negotiated with Mr. M. P. Poddar and which was covered by the agreement dated April 4, 1991 should not, if possible, be allowed to fall through because of the current dispute. In the circumstances the committee agreed to endorse the revised arrangement which had been arrived at with the buyers. The committee also authorised the executive vicechairman to write to Mr. M. P. Poddar confirming this arrangement." It is evident from the above facts that true nature of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was having business links. The Commissioner of Income-tax (Appeals) completely failed to appreciate the case of the Assessing Officer that write off were in connection with disposing of assets/undertaking, comprising 2,89,668 equity shares of Ralliwolf Ltd. and 43,228 equity shares of ISM and the entire engineering unit. The finding of the Commissioner of Income-tax (Appeals) is without appreciating the facts of case and case made out by the Assessing Officer. Under the circumstances the order of the Commissioner of Income-tax (Appeals) cannot be upheld. If we examine the issue from the point of view of the assessee for allowing the claim as trading loss on the ground that the assessee was having business relation and control over RWL and ISM, when the assessee claims the trading/business loss then RWL and ISM should offer these trading gains under section 41(1) of the Act. The assessee-company having good and near business relation as claimed by the assessee, the assessee should have knowledge about it. The burden in this regard is on the assessee. But the assessee failed to explain about it. The assessee cannot escape from its onus by saying that RWL and ISM were sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. As stated above the transactions of write off and claim as loss are part of the transactions related to sale of the shares of RWL and ISM and engineering unit which is capital in nature, therefore such capital loss is not allowable as business loss. Such loss was allowed by the Assessing Officer in computing capital gain/loss on sale of the engineering unit and the assessee cannot have any grievance whatsoever. We therefore set aside the order of the Commissioner of Income-tax (Appeals) and restore that of the order of the Assessing Officer. The ground of appeal of the Revenue is allowed and that of the assessee is dismissed. The second ground is in respect of deletion of Rs. 1,07,36,000 on account of bad debts. During the course of assessment proceedings, the Assessing Officer noticed that out of the total claim f bad debts of Rs. 1,07,36,000 a sum of Rs. 44,00,000 relates to the engineering division. The engineering division was sold on the very first day of the accounting year. The Assessing Officer was of the view that the business which led to such debts was not in existence during the previous year, therefore, the debts cannot be allowed as a deduction from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tunity of hearing to the Assessing Officer. Under these circumstances, the learned Departmental representative submitted that the matter may be sent back to the file of the Assessing Officer. The learned authorised representative, on the other hand, submitted that the assessee has furnished complete details before the Assessing Officer vide letter dated September 5, 1994, of which copy has been placed at pages 65 to 67 of the paper book. The learned authorised representative submitted that division-wise details of bad debts were furnished to the Assessing Officer. On the basis of details submitted before the Assessing Officer referring to pages 86 to 91 and 98 of the paper book, he submitted that the bad debts related to agro-chemicals division and not engineering division. The learned authorised representative referred to page 168 of the paper book where the details of ground No. 2 raised before the Commissioner of Income-tax (Appeals) has been placed wherein it was stated that the Assessing Officer has wrongly assumed that debts written off under the head " diesel engine" were in respect of the engineering division, which was sold during the previous year. Actually, the position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirm the order of the Commissioner of Income-tax (Appeals). Ground No. 3 reads as under : "That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals)-VI, Calcutta on the issue of computation of profit on sale of shares of RWL, erred in directing the Assessing Officer to accept the yield method for valuing the said shares as at April 1, 1974, instead of break-up method by the Assessing Officer." The Assessing Officer noticed that the assessee while calculating the capital gain on sale of shares of RWL, the market value of shares as on April 1, 1974 had been calculated by yield method taking 9 per cent. as the rate of interest for the purpose of capitalisation. The Assessing Officer was of the view that yield method is valid for a profit making concern. Since RWL was in loss, the correct market value had to be determined in accordance with Schedule III of the Wealth-tax Act. The Assessing Officer, accordingly, recalculated the long-term capital loss at Rs. 11,77,97,333. The Assessing Officer further held that this loss had been incurred in connection with sale of engineering division, therefore, in view of the second proviso to sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses show that they were all revenue items incurred for the contract, which was an additional line of business of the assessee. The learned Departmental representative has relied upon the order of the Assessing Officer whereas the learned authorised representative relied upon the order of the Commissioner of Income-tax (Appeals) and submitted that the expenditure incurred for the Iran project was revenue in nature like staff salary, transferring business and other expenses, bank charges and stationery, etc. The learned authorised representative submitted that the Commissioner of Income-tax (Appeals) has allowed the assessee' s claim after considering the relevant facts as pointed out by the assessee, of which a copy has been placed at page 170 of the paper book. The learned authorised representative while referring to the return of income for the year ending March 31, 1992, of which copy has been placed on page 13 of the paper book and submitted that the expenditure incurred is a part of the assessee' s business under agro-chemicals division, therefore, such expenses are allowable. We have heard the learned representatives of the parties and perused the record. We find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable for that assessment year : Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year ; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :" On reading of the above section, we find that first proviso to section 72(1)(i) clearly provides that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year. This proviso to clause (i) to section 72(1) was omitted by the Finance Act, 1999 with effect from April 1, 2000. Thus, prior to April 1, 2000 the condition for allowing carry forward was that the business for which the loss was originally computed continued to be carried on by the assessee in the previous year relevant for that assessment year. In the case under consideration, it is an admitted fact that the said business loss is related to engineering unit of the assessee, which has been sold, that means, the business for which the loss was originally compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rth assessment year immediately succeeding the assessment year for which the loss was first computed." On reading of the above provision, we find that losses under the head " Capital gains" can be set off only against the profit under the head " Capital gains" assessable for the assessment year and if the loss cannot be wholly set off the amount of loss, set off can be carried forward to the following assessment year, however, not more than eight assessment years immediately succeeding the assessment year, for which the loss was first computed. Therefore, we do not find any infirmity in the order of the Commissioner of Income-tax (Appeals) as he has rightly held that the carry forward and set off of the losses under the head " Capital gains" is allowable under section 74 of the Act. However, certain final calculations are to be made in this regard after giving effect to this order. The Assessing Officer is directed to recalculate the loss under the head " Capital gains" and allow the set off and carry forward in accordance with section 74 of the Act. Cross-objection No. 11/Cal/2000-by the assessee The assessee has raised the following grounds in cross-objection : " 1. That on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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